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A foreclosure on your record could damage your credit. Read on to learn more.
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When you sign a mortgage, you’re making a commitment to keep paying that loan until your home is paid off. So if you fall behind on your loan payments, your mortgage lender might eventually have to force the sale of your home to get repaid in a process known as foreclosure.
Experian says that usually, you need to have skipped four consecutive monthly payments for your home loan to wind up in foreclosure. But once that happens, you run the risk of losing your home. And that could not only upend your lifestyle, but also, damage your credit score significantly.
A major red flag
The extent to which your credit score drops after a foreclosure depends on different factors, including how high or low it was to begin with. Also keep in mind that every time you have a late payment on record, whether it’s a mortgage payment or a credit card bill whose deadline you let pass, your credit score takes a hit.
And we just learned that a lender generally won’t pursue foreclosure until you’ve missed four payments in a row. So by the time you’re facing foreclosure, your score might have already taken a beating, and the foreclosure itself may not actually cause it to plunge so much more.
But either way, you should know that a foreclosure is really bad news from a borrowing standpoint. No matter how much it impacts your credit score and how low that number gets, your foreclosure will stay on your credit report for seven years, and there’s generally nothing you can do to get it erased sooner. So whether your credit score falls by 100 points, 200 points, or more, the reality is that if a lender sees a foreclosure on your credit report, it will be less likely to want to loan you money.
How to avoid foreclosure
Because home values are fairly elevated these days, it may be possible for you to avoid foreclosure by simply putting your home up for sale if you can’t afford to make your monthly mortgage payments. However, if you’re underwater on your mortgage — meaning your loan balance is higher than your home’s market value — then that won’t work unless you happen to have enough money to make up the difference (and if you’re behind on your mortgage payments, chances are, that’s not the case).
In that situation, one solution you could look at is a short sale, where your lender agrees to sell your home at its market value, and whatever it sells for will satisfy your remaining mortgage balance. In other words, if you owe $180,000 on your home and it only sells for $170,000, your lender would simply eat the difference.
Now, you should know that a short sale, like a foreclosure, will show up on your credit report. But it may not serve as the same red flag as an actual foreclosure. And so it may be your best option if your lender is willing to agree to it.
One final route you can look at if you’re having trouble making your mortgage payments is to find somewhere to crash temporarily (say, with a family member or friend) and rent out your home to a tenant. If you’re able to command enough rent to cover your mortgage payments, you can try to wait out the market and see if the value of your home rises.
But this option can be risky and complicated in its own right and will only work under the right circumstances. So you may, unfortunately, be limited to a short sale if you can’t sell your home for a high enough price to pay off your mortgage in full.
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